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It is worthwhile to mention here that Narendra Modi govt post taking over the nation has been sending the right noises and one of them is the possible 'deregulation' of diesel prices which has grabbed space in business papers.

Stock markets have reacted positively to this noise. If this is done, it could reduce the Government subsidy burden. It is important to know the connection between this Government action and the impact on the market sentiment.

What is deregulation?

Prices of fuels like diesel, kerosene and cooking gas, sold to people are controlled by the Government. It used to fix the price of petrol too until it was deregulated in June 2010. In January 2013, the UPA II Government announced a partial deregulation of the diesel. Following this, prices of diesel were hiked by 50 paisa each month. This continues till date. Now, reports suggest that the Government is considering a complete deregulation of diesel prices.

What Deregulation means?

Once the Government announces a complete deregulation of diesel prices, Government-owned oil marketing companies (OMCs) like HPCL and BPCL, would get the power to decide the price of diesel based on market prices of the fuel. Currently, diesel is sold at cheaper rates than the cost of production. So, a deregulation will likely lead to a rise in prices. OMCs can also tweak the rates whenever the cost of production falls or rises.

How Oil Deregulation affects investors?

As an investor, a diesel deregulation will be a welcome move. This is because oil marketing companies will benefit from the move. Currently, they make losses due to the lower selling price. Although the Government compensates the companies, the payments are usually delayed. This puts these companies under severe financial pressure. The deregulation will ease this pressure off. Additionally, it will strength the India currency as Government's balance sheet will become stronger.

How Government subsidies get affected by Deregulation?

Another important impact of the deregulation will be on Government subsidies. Since it no more regulates the prices, it would not have to compensate the OMCs. This will lower the Government's subsidy bill. This fall in expenditure could help it narrow its fiscal deficit - the amount by which the Government's spending exceeds its revenue. It is expected to spend nearly Rs 11,500 crore on diesel subsidy this year, according to a FirstPost report. Its total fuel subsidy bill is expected to be Rs 90,000 crore, higher than the Rs 63,426 crore budgeted by the Government.

When Deregulation is Likely to Occur?

The Government is most likely to wait for international oil prices to fall further, according to reports. It is believed that the Government favours oil prices to hold below $100 per barrel to undertake any reform. International oil prices are lowest since June 2013 right now. However, any escalation in the Middle East conflict that could disrupt supplies of oil to India could delay the decision. Govt may seek cabinet nod soon for deregulation of the diesel prices. However any gross rate difference will give impetus to inflation.

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